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Springate score definition

Description

Springate score is a model, used to evaluate the company’s probability of bankruptcy. It was created in 1978 by Gordon L.V. Springate, who continued developing the Altman model. Inspite of that, the Springate score is still a less popular model for bankruptcy predictions than Altman’s model. Data needed to calculate this ratio is collected from the balance sheet, income statement and cash flow statement.

This bankruptcy calculation model is important for the company’s investors and creditors (also owners), as it provides information on how close the company is to a possible bankruptcy.

Norms and limitations

If the value is below 0.862 it means that the possibility of a company’s bankruptcy is high, so the company is considered unstable and dangerous.

In general,if the value of Springate score goes down to 0.9 or below, it would be smart to consider paying serious attention to the company’s condition.

Formula

Assets (Total assets) - a balance sheet item, representing what a company owns.

Debt (total debt, total liabilities) is calculated by adding together long term debt with short term debt. These two measures can be easily located on the balance sheet.

Net sales (revenues, sales) can be described as sales, deducting returns and discount for customers.

Equity (Shareholders’ equity) shows the equity stake, currently held on company’s balance sheet. In other words, it means total assets minus total liabilities.

Working capital (net working capital, NWC) is calculated by deducting current liabilities (current debts) from current assets.

Retained earnings is a measure that shows a part of the net income, which was not paid out to the shareholders as a form of dividends.

Earnings before interest and taxes (EBIT) equal net income, plus interest expense, plus taxes.